Is Alcoa Still Worth the Wait?

NEW YORK ( TheStreet) -- The challenge imposed by the tough economic climate has served as a disruption for even the most fundamentally sound businesses.

This reality makes it difficult to have anything but a dismal outlook for companies like Alcoa ( AA) that are in economically sensitive businesses such as aluminum.

By and large, this has been what has kept investors at bay although Alcoa's stock remains undervalued from its true long-term potential. There's no question the stock will soon rebound because the economy is showing signs of improvement, albeit slowly.

But I wonder, how long should investors wait and will the patience pay off?

Doing More With Less

If nothing else, the company is consistent. Alcoa understands the challenge it faces and continues to execute as best as it can until circumstances improve. This was especially true upon dissecting the results of its third-quarter earnings report, which revealed another solid performance despite significant market turmoil.

Though Alcoa reported a loss of $143 million, this figure had little to do with its execution as it included a payout of $173 million stemming from a previous legal dispute. Excluding this cost, Alcoa actually earned $32 million, or 3 cents per share, enough to beat EPS estimates, which was expected to be flat.

Alcoa also beat on its revenue number, which registered at $5.8 billion -- topping estimates of $5.54 billion. That its revenue dropped year over year by 9% wasn't much of a concern considering the broader climate of the aluminum business, resulting in price declines of 5% sequentially and 17% year over year. Nonetheless, Alcoa was able to deliver close to $100 million of aggregate growth when combining all of its segments.

The improved performance was the result of the company's management figuring out ways to develop productivity gains, which helped offset cost concerns. But how long can the company pull a rabbit out of its hat without aluminum prices showing signs of a recovery? Betting on Alcoa at this point requires faith in the company's management being able to do more with less.

Moving Forward

Although things might look a little grim now, over the long term there are plenty of causes for optimism. Alcoa's management continues to show its belief in the aluminum business and fully anticipates that demand will pick up. Management also continues to speak favorably about the automotive and aerospace industries where companies including Ford Motor ( F) and Boeing ( BA) have started to migrate towards using aluminum in their vehicles and jets.

While forecasting demand growth of 6% over the next several quarters, Alcoa expects other areas of its business to see significant improvements. These include gas turbine markets, food packaging and commercial transportation.

Likewise, there are also plenty of growth opportunities in areas such as appliances where names including General Electric ( GE) might become significant consumers of aluminum. Alcoa stands to benefit immensely once the market rebounds.

Bottom Line

Alcoa deserves a considerable amount of credit for having done more with less. But "moral victories" are typically never enough to move stocks in the right direction. The good news is that it seems the company's management is committed towards returning value to shareholders. But it goes back to the question: How long are investors willing to wait?

The stock looks incredibly cheap to me. But as I've said before, unless aluminum prices recover we may be repeating this for the next four quarters.

This is no indictment on the company or its management. Alcoa today has considerable value. However, the stock will test your resolve.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.